Cost cutting: Focus on long term goals

With liquidity tightening, companies are increasingly looking for ways to cut spending. In a recent survey of Fortune 1,000 companies, 80% of respondents said that they look at supply chain departments for their cost cutting initiatives. However, cost cutting in supply chains requires the right mindset. As with any crisis, cool heads are required to steer the organization and the supply chain through tough times.

When does cost cutting fail? Supply chain cost cutting should not only be included in the agenda during a downturn. It should be a continuous process in any department. Companies that have a culture of continuous improvement are likely to have more success in implementing cost cutting initiatives.

Working with suppliers. Putting pressure on service partners to reduce cost is one thing, but when service partners fail, it can have severe consequences to the whole supply chain. When partners fail, customer service levels will suffer, and customers will be more likely to jump ship. Companies must work with partners and identify mutual cost cutting opportunities. With supply chain collaboration, companies are more likely to succeed.

Reducing inventory. Cash flow and working capital are both key to any company. Managers must evaluate ways to reduce cycle stock and delay payments. For example, companies can negotiate consignments and defer payments. Ownership of the consignment stock is not transferred until used.

Rationalize stock-keeping-units (SKUs). During the downturn, when sales are questionable, it can also make it easier for customers to make purchasing decisions. Also, during a downturn, companies can rationalize SKUs. Elimination of slow yielding SKUs will have a positive effect on working capital, often with limited impact on customer service levels.

The information technology crunch. For example, Transportation Management System (TMS) can reduce travel time and distance, and save on energy and fleet costs. Software, such as Business Intelligence (BI), can identify cost opportunities in the supply chain, including poor pricing principles and workflow processes. An investment in IT can help create the type of lean organizations that can keep companies running during the downturn.

Evaluate transportation. For example, companies can evaluate ways to reduce warehousing facilities. Companies can consolidate purchase orders from multiple distribution centers and cross dock. By making use of cross-docking, companies can reduce less than truck load (LTL) deliveries and improve efficiencies in the organization. Companies can also make use of postponement centers to reduce lead times and improve cash flow.

Evaluate contracts. During a slowdown companies must also evaluate compliance and contracts. Transportation departments should study contracts and payments carefully, and only pay for what they agreed on. Companies are normally in a much better position to negotiate better rates and request more flexibility. The downturn is a great time to get the transportation house in order.

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Published by Tielman Nieuwoudt

Tielman is a Certified Supply Chain Professional (APICS) and has a Bachelors degree in Marketing (SA) and a MBA in International Business from the University of Edinburgh in Scotland.
Tielman has been a contributor to Strategic Marketing Africa, How We Made It In Africa, Logistics Insight Asia, Logistics Times India, CHaINA (China) and Vietnam Supply Chain Insights.
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